Today's Buggy Topic
It's found in a thread at Brad Setser's web-site, run by the Council of Foreign Relations, that operates under the name of "Follow the Money" . . . Setser himself a former USA Treasury official, who specializes in financial relations between the USA and others --- including, among other key topics, the contentious exchange-rate mechanism that China runs with the $US. Setser probably knows more about this politically charged financial and trade mechanism and the overall Chinese-American economic relationship than any other specialist in the world. Prof bug, interested in this relationship for its own sake --- but even more for the diplomatic, economic, and military implications of China's rapid rise in economic prowess for the overall American global role --- reads most of Setser's daily columns with ongoing regularity and appreciation.
Doubly so, please note, because China's huge investments of its 1.5 trillion US dollars --- an outcome of its large annual bilateral trade surplus with the US for well over a decade now --- in US Treasury bills and bonds, as well as in other US financial assets, is partly hidden and hard to trace. All in all, Setser traces it more effectively than anyone else in public writings . . . or so it seems.
Click here for the Setser post that started the thread, then run a buggy search --- or for Michael Gordon --- and then note a reply two or three posts later from Dr. Setser to the bugged-out comments. (Observe that Dr. Setser corrected a buggy error. Prof bug thought that Thailand's reserves of foreign currency were virtually all US dollars; Dr. Setser noted that it also holds a lot of euros. That means the Thais could, in principle, swap euros for Chinese Renminbi (Yuan) and use it as a reserve currency, without Beijing having to take on more dollars for its reserves than it might want to hold.)
Note: Before You Click on the Setser Link, Do Two Things First
- Read the rest of the buggy commentary here. It will provide you with a broader perspective on the question of China's future role in the global financial system.
- And, for an even rounder perspective on the challenges and problems that the Chinese Communist Party leadership faces in guiding China's overall economic development --- in particular, in achieving the CP's aspirations that China become a rich, technologically advanced country and hence an eventual great power --- you might find it worth while to read this lengthy buggy commentary that prof bug set out a few weeks ago at Economist's View. Click here for that bugged out stuff
And now back to today's buggy comments.
The Overall Economic Relationship Between China and the US Clarified
Start with China's epochal developmental transformation since 1979, the start of the post-Maoist shift of the Chinese Communist Party leadership to move toward a state-directed market-economy not that much different, three decades later, than the kind of statist economy that, say, South Korea operated under in the era of its military dictatorship between the 1960s and the later 1990s.
The result is an economy that is increasingly market-oriented, but still under the CP's direction in key areas: dominance by the government of major banks, controls over investment flows in and out of the country, restrictions on imports, subsidies to exports ---- the major subsidy a managed exchange rate that keeps the Chinese Yuan (called the Renminbi for external use with foreign countries) under-valued in dollar-terms ----and a large sector of state-owned giant firms that the CP has trimmed mightily in employment the last two decades, but still important enough to influence the overall economy's functioning. Among other things, that means these state-owned enterprises have more investment capital allocated to them by the government-controlled banks than would otherwise be the case in a free-market.
The major difference between the current Chinese economy and the South Korean economy in the military dictator era is that China has been markedly more open to multinational investment from abroad: mainly from Taiwan, South Korea, Japan, Singapore, the USA, and the EU. The result has been an increasingly fast climb up a ladder of manufacturing skills, output, and productivity. In effect, about 60-65% of China's manufacturing exports yearly to the rest of the rest are pass-through of foreign multinational technology and component-parts, with these multinational firms using disciplined, fairly skillful Chinese labor as a low-wage assembly plant on a vast scale for exports.
- Outcome One: China's economy has become heavily dependent on export-led growth as the major stimulus to overall domestic production. Its trade with the outside world between 1998 and the start of 20o8 expanded by 500%. Between 2003 and the end of 2007, as the global economy's growth mushroomed, its exports were growing at an astounding 17% or so a year. In 2007, its $1.3 trillion of exports were about 37% of China's total GDP. Together with domestic investment, the result is that domestic consumption in China is AN astonishingly low 39% of GDP (again at the end of 2007, before the global economy's recent meltdown). There's never been an economy in Asia or elsewhere where domestic consumption has had such a low share of GDP.
Some clarification seems in order here:
- China's main export partners are the US 19.1% of the total, Hong Kong 15.1%, Japan 8.4%, South Korea 4.6%, and Germany 4% (2007) And its main import partners are Japan 14%, South Korea 10.9%, Taiwan 10.5%, US 7.3%, Germany 4.7% (2007)
- Note in passing that Germany was the world's largest merchandise exporter in 2008, its sales abroad totaling about $1.5 trillion (about 49% of Germany';s GDP!). That gave it 9.1% of total goods exports in the world economy. China came in second with $1.4 trillion worth of exports and placed it second at 8.9% of global export-trade in goods. The US was third: its exports of goods totaled $1.3 trillion or 8.1% of global export-trade. Japan was fourth, with 4.9% of the total, and Holland was 2nd with 3.9%.
- If you add in goods-imports to trade, the US bill was $2.17 trillion or 13.2% of total imports world-wide. Germany came in second, with $1.21 trillion worth of imported goods or 7.3%. China came in third ($1.13 trillion or 6.9% of total global imports); Japan fourth ($762 billion or $4.6%) and France fifth ($708 billion or 4.3% of the total).
- Add in commercial services --- financial services, transports of goods, tourism, movies, TV, and so on ---the US remains by far the biggest overall trader (with a big surplus in such services) among countries world-wide, but with the EU as a whole (again excluding internal trade) holding a slightly higher percentage. Remember here: the US population is about 300 million, and the EU's about 500 million. The overall US GDP in Purchasing Power Parity is about the same as the EU's --- roughly $14.5 trillion last year. In per capita income calculated in PPP terms (not existing exchange rates) ---- PPP measures seek, recall, to overcome fluctuations in exchange rates by trying to equalize price-levels in different economies ---- the US's was $47,000 and the EU's about $33,400. Germany's, France's, and Britain's per capita income are slightly higher than the EU average.
What emerges? In effect, the US remains one of the two biggest traders in the world, with about 26% of the total; and its import-buying consumers are much richer than those elsewhere . . . two data-points that are relevant to its maintenance of the $US as the primary reserve currency globally: about 64% of the total. The EU as a whole --- excluding its internal trade --- is a close rival of total world trade, and with the Euro accounting for about 26% of the reserves held by foreign Central Banks. The remaining reserves are small amounts of Yen, Swiss Francs, and British pounds, plus some SDR's (special drawing rights furnished by the IMF, based on a basket of currencies).